IMF downgrades outlook for world economy; 2019 estimate for Canada unchanged

WASHINGTON – The International Monetary Fund is further downgrading its outlook for the world economy, predicting that growth this year will be the weakest since the 2008 financial crisis primarily because of widening global conflicts.

The IMF’s latest World Economic Outlook foresees a slight rebound in 2020 but warns of threats ranging from heightened political tensions in the Middle East to the threat that the United States and China will fail to prevent their trade war from escalating.

Its 2019 projection for Canada foresees economic growth of 1.5 per cent, rising to 1.8 per cent growth in 2020 – down from the previous estimate of 1.9 per cent growth in 2020. Both estimates are down from the 1.9 per cent growth experienced by Canada in 2018.

The updated forecast released Tuesday was prepared for the fall meetings this week of the 189-nation IMF and its sister lending organization, the World Bank. Those meetings and a gathering Friday of finance ministers and central bankers of the world’s 20 biggest economies are expected to be dominated by efforts to de-escalate trade wars.

The new forecast predicts global growth of 3.0 per cent this year, down 0.2 percentage point from its previous forecast in July and sharply below the 3.6 per cent growth of 2018. For the United States this year, the IMF projects a modest 2.4 per cent gain, down from 2.9 per cent in 2018.

Next year, the fund foresees a rebound for the world economy to 3.4 per cent growth but a further slowdown in the United States to 2.1 per cent, far below the 3.0 per cent growth the Trump administration projects.

IMF economists cautioned that even its projected modest gains might not be realized.

“With a synchronized slowdown and uncertain recovery, there is no room for policy mistakes, and an urgent need for policymakers to co-operatively de-escalate trade and geopolitical tensions,” Gita Gopinath, the IMF’s chief economist, said in the report.

Last week, the United States and China reached a temporary cease-fire in their trade fight when President Donald Trump agreed to suspend a tariff hike on US$250 billion of Chinese products that was to take effect this week.

But with no formal agreement reached and many issues yet to resolved, further talks will be needed to achieve any meaningful breakthrough. The Trump administration’s threat to raise tariffs on an additional $160 billion in Chinese imports on Dec. 15 remains in effect.

The IMF’s forecast predicted that about half the increase in growth expected next year will result from recoveries in countries where economies slowed significantly this year, as in Mexico, India, Russia and Saudi Arabia.

This year’s slowdown, the IMF said, was caused largely by trade disputes, which resulted in higher tariffs being imposed on many goods. Growth in trade in the first half of this year slowed to 1%, the weakest annual pace since 2012.

Kristalina Georgieva, who will preside over her first IMF meetings after succeeding Christine Lagarde this month as the fund’s managing director, said last week that the various trade disputes could produce a loss of around US$700 billion in output by the end of next year or about 0.8 per cent of world output.

IMF economists said one worrisome development is that the slowdown this year has occurred even as the Federal Reserve and other central banks have been cutting interest rates and deploying other means to bolster economies.

The Bank of Canada has taken a different approach so far. It left its key short-term rate unchanged at 1.75 per cent last month. It said Canada’s economy was operating close to potential and inflation was on target but noted that trade conflicts and related uncertainty were taking a toll on the global and Canadian economies.

The Bank of Canada’s next interest rate announcement and monetary policy report is scheduled for Oct. 30, following the federal election on Oct. 21.

The IMF estimated that global growth would have been about one-half percentage point lower this year and in 2020 without the central banks’ efforts to ease borrowing rates.

“With central banks having to spend limited ammunition to offset policy mistakes, they may have little left when the economy is in a tougher spot,” Gopinath said.

In addition to trade and geopolitical risks, the IMF envisions threats arising from a potentially disruptive exit by Britain from the European Union on Oct. 31. The IMF urged policymakers to intensify their efforts to avoid economically damaging mistakes.

“As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list,” Gopinath said. “Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing and raise world growth.”

The IMF projected that growth in the 19-nation euro area will slow to 1.2 per cent this year, after a 1.9 per cent gain in 2018. It expects the pace to recover only slightly to 1.4% next year.

Growth in Germany, Europe’s biggest economy, is expected to be a modest 0.5 per cent this year before rising to 1.2 per cent next year.

China’s growth is projected to dip to 6.1 per cent this year and 5.8 per cent next year. These would be the slowest rates since 1990, when China was hit by sanctions after the brutal crackdown on pro-democracy demonstrators in Beijing’s Tiananmen Square.

For Japan, the IMF expects growth of just 0.5 per cent next year. It foresees an expansion in Russia of 1.9 per cent, up from 1.1 per cent this year.

And Mexico is forecast to experience growth of 1.3 per cent next year, far better than the lacklustre 0.4 per cent gain envisioned for this year.

– With files from The Canadian Press in Toronto

Martin Crutsinger, The Associated Press